Tragically, due to continuous failure of our economic and tax-managers, we are now confronted with a grave economic crisis. We have a monstrous fiscal deficit - more than Rs 900 billion - forcing us to borrow more and more money from different sources - external and internal. We have one of the lowest tax-to-GDP [8.9%] ratios in the world, whereas the debt-to-GDP has crossed the critical level of 65%.
Public debt has touched the figure of Rs 9.0 trillion on 30-06-2010 - an increase of 1.3 trillion in one year - on June 30, 2009, the figure was Rs 7.795 trillion. Debt-to-GDP ratio of 60.0 percent permissible under the Fiscal Responsibility and Debt Limitation Act (FR&DLA) stands violated with impunity by the government because of endless borrowings from banks and foreign institutions. Debt-servicing has increased to Rs 873 billion and if we add the figure of loan-repayments, it comes to Rs 1644 billion - 98% of the total federal revenue target fixed for the current fiscal year.
During the current fiscal year, the federal government estimates its net resources - after transfers to provinces etc - at about Rs 2477 billion against total earmarked expenses of not less than Rs 6722 billion. The shortfall is simply shocking, yet the government is least concerned and not serious at all to cut unproductive expenses. Instead of reducing wasteful expenses - look at the expected expense of useless visit of President Zardari to UK - and getting rid of loss-ridden corporation, the government is bent upon levying indirect taxes, increasing prices of inputs utilised by business houses, without realising its impact on the lives of common men. Due to diminishing purchasing power, businessmen can no longer recover the cost of various inputs from the end users. Together these factors create a most undesirable economic picture.
The prime duty of tax professionals during these critical times is to acquire knowledge, share it with fellow human beings and act collectively to find ways to come out of this grim crisis. As tax professionals, it is our duty to suggest practical ways to boost tax revenues. The target of collecting Rs 1.667 trillion in current year is too low - our real tax potential at federal level alone is more than Rs 4000 billion.
FBR did not meet the revenue target of Rs 1380 - revised downwards from original 1500 billion - for the last fiscal year. According to State Bank of Pakistan, the shortfall is to the extent of Rs 30 billion. It requires thorough probe by the House Standing Committee on Finance. Public hearings at this forum should be conducted to find out the reasons for the FBR's failure in meeting the required target of tax-to-GDP ratio of 10.2% for fiscal year 2009-2010. The committee should invite, besides the FBR representatives, experts in the taxation field, representatives of All Pakistan Tax Bar to give their opinions. On the basis of their findings and recommendations, the committee can prepare a detailed report for the parliament and government for fixing responsibility, devising policies and making action plans to improve the pathetically low tax-to-GDP ratio.
Tax professionals can play a very vital role by highlighting the loopholes in the tax system and suggesting remedial measures. Revenue worth trillions of rupees have been sacrificed by the governments - civil and military alike - since 1977 extending unprecedented exemptions and concessions to the privileged classes. Even tax practitioners have felt the setback on account of excessive resort to presumptive taxation. It has led to the going-out-of-business of many professionals, especially those working on a small scale as full and final concept deprived them of clients needing their help to file returns and follow up their assessments with the authorities. Tax professionals must campaign against oppressive, anti-people policies and work relentlessly for establishment of an egalitarian state. We can make Pakistan a self-reliant, prosperous and progressive society by following the model of Finland.
Finland is divided into municipalities, whose administration is based on the self-government of their residents. The decision-making power of local authorities is exercised by a council elected by the residents. Provisions on the general principles governing municipal administration and the municipalities' duties are set out in an act. Additionally, the municipalities have the right to levy municipal tax. Municipalities in Finland have wide-ranging powers. In accordance with the Local Government Act, local authorities perform the functions that they are responsible for by virtue of their autonomy and those that they are required to do by law.
Extensive functions that fall within the specific sphere of authority include education, health care and social welfare services. Furthermore, the municipalities are responsible for matters related to the residents' free-time, recreation, housing, and the management and maintenance of their living environment (ie roads, streets, water supply and sewerage), as well as land-use planning and functional municipal structures.
Tax revenues have a critical role in municipal finances. The power to levy and collect taxes is one of the cornerstones of municipal self-governance as it ensures that the municipalities can manage the functions that they have undertaken to execute or that they are responsible for by law. The most important is municipal tax, which amounts to almost 13 billion euros. Corporate income tax amounts to a little over 1 billion euros, and real estate tax also raises almost 1 billion euros - Pakistan collects less than 12 billion Euros as taxes both at federal and provincial level.
If a country of 5.3 million people (Finland) can achieve this level of taxation at municipal level alone, we, a nation of over 190 million can do much more, provided we have the will.
One of the central constitutional principles regarding municipal self-governance in Finland is that, when allocating new functions to municipalities, the state has also to ensure that they have the necessary resources to carry them out. Finland has a well-functioning relationship between the state and the local authorities, as well as a state-subsidy system, which ensures municipal resources and residents' equal access to services. We can learn from this great innovation of Finland. It can change the fate of the nation overnight. We have resources but system for self-governance as in vogue in Finland and elsewhere in the world is non-existent. Resultantly, power is not with the people but in the hands of the privileged few.
Economic equality and prosperity, peace and social tranquility can never be achieved unless taxation system is reformed completely - it needs partial decentralisation where taxes are collected for education, healthcare and social welfare services through municipalities working on the principle of self-governance - and revenues are collected and utilised for the public's benefit.
(This is excerpt from the keynote address made by the writer at Pakistan Tax Bar Association Summer Workshop held in Bhurban from 29 July 2010 to 1 August 2010)
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